It's the most common question I receive from aspiring freelancers of all types: How much should I charge? The question comes packaged in various different guises—whether it is a beginner dipping their toes in the freelancing waters for the first time or someone who has been freelancing for a while but wants to renegotiate their rate with a client.

Setting and negotiating rates can seem like one of the most complicated and intimidating parts of freelancing but it really doesn't have to be. Today I'm going to give you an in-depth overview of how to set and negotiate rates with prospective and existing clients. Although I'm a freelance writer, I believe that most of the following advice applies to any service-based business.

Your Minimum Acceptable Rate (MAR)

The first thing you must do as a freelancer is ascertain the lowest equivalent hourly rate you are willing to work for—your Minimum Acceptable Rate (MAR). If you're already a full-time freelancer (or are planning on being one), your MAR calculation should look something like this:

( (personal overheads + business overheads) / hours worked ) + tax

Let's look at a practical example. Say your personal overheads (i.e. the total cost of keeping a roof over your head, food on your plate, and so on) are $30,000 p.a., and your business overheads are a projected $5,000 p.a. You plan on doing client work for 6 hours a day for 48 weeks of the year (1,440 hours total). Here's the calculation for your MAR (gross of tax):

($30,000 + $5,000) / 1,440

Your MAR (gross of tax) is $24.31. Add say 20% for tax, and your MAR (net of tax) is $29.17.

If the above calculation seems a little rough, that's because it is. Don't concern yourself with trying to set a precise MAR, because there are far too many variables at play to perfect it anyway. Using the above calculation does the job well enough, as long as you err on the side of conservatism.

Another way to calculate your MAR is to take your previous (or current) salary and divide it by the number of hours you plan on working. The addition of overheads should be covered by the reduction in tax from being self-employed, but you may want to confirm this for yourself. I am not a fan of this approach—you will probably be underselling yourself wildly. Freelancers should earn far more than employees, pound for pound. However, it can be a good starting point—it's the calculation I made when I was deciding whether or not quit my job.

If you're just getting started with freelancing part time, your MAR is more a case of how highly you value your own time. You need to work for an amount of money that puts you in the right mindset to deliver an exemplary service. If you do anything less, you may deliver poor work and end up damaging your reputation. As you develop as a freelancer, your MAR may increase based upon how much you want to earn, as opposed to how much you need.

Pricing Format

When it comes to deciding how you should price your services, start with this key understanding in mind—charging by the hour is one of the worst mistakes a freelancer can make. There are two key reasons for this.

It Limits Your Earning Potential
If you charge by the hour, it will only be natural for you to work less efficiently than if you had priced on a per job basis. And given that you only have a certain number of hours available in the day, you are essentially capping your maximum earning potential. You can of course raise your hourly rates, but you will still only have the same number of hours to work with (literally and figuratively).

If. on the other hand, you price on a per job basis, you are limited only by the speed in which you can complete your work. You will learn to work more productively, and in turn, will earn a higher equivalent hourly rate (and impress clients with your efficient style and quick turnaround).

It Clouds Your Clients' Judgement
An hourly rate is a big psychological hurdle for many prospective clients. The same job priced in two different ways can provoke wildly different reactions. Let me explain: Say you're presented with the opportunity to write a 1,500 word article on a complex and technical topic that you just happen to be well-educated on. Given the nature of the content, the client is happy to pay $150 for the article. He assumes it will take 3 hours, and deems $50 to be a reasonable hourly rate (but you don't know that).

Consider these two different pricing approaches:

State that the article will cost $150 to produce.

State that the article will take you around an hour to produce, and will cost $150.

The client would happily accept option 1. He would almost definitely balk at option 2.

It's simple psychology—the perception of value. Chris Guillebeau touched upon this in The $100 Startup. He paid $50 to a locksmith for an ultra-quick turnaround in an emergency, yet he felt shortchanged by the transaction. Chris remarked on his illogical reasoning:

…I realized that I secretly wanted him to take longer in getting to me, even though that would have delayed me further. I wanted him to struggle with unlocking my car as part of a major effort, even though that made no sense whatsoever. The locksmith met my need and provided a quick, comprehensive solution to my problem. I was unhappy about our exchange for no good reason.

Our theoretical client would feel illogically unhappy about pricing option 2, in the same way as Chris did about his locksmith experience. The difference is this: most people don't have Chris' presence of mind to understand their illogical reasoning. Your competence and the speed at which you are able to do you work can have a huge impact on your bottom line. Don't undercharge yourself by charging by the hour just because you happen to be good at what you do and can do it quickly and efficiently.

Service Value

It is always important to view your work through your client's eyes and from a commercial perspective. Consider this: how will your work benefit the client? How will it positively affect their bottom line? The answer to this question dictates in part the amount you can charge. For instance, an article for a small business blog is likely to have a relatively limited impact. If on the other hand, if you're writing copy for a huge multinational corporation, the benefit of your services could be enormous. You should price accordingly.

Bear this in mind when developing your freelancing business. When possible, place your services in what I like to call "huge client benefit areas." Instead of writing blog posts for small clients (small client benefit), migrate your services to high-end blog editing for Technorati 100 blogs (huge client benefit). Instead of designing logos for local businesses (small client benefit), work as a design consultant for Fortune 500 companies (huge client benefit). Such ideas may seem outlandish at this point in your career, but it's amazing where endeavor and planning can take you.

The Competition

What you can charge depends to a large extent on how much your competition charges. But what are they charging? Can you find out? Many freelancers post their rates on their websites. You might even consider asking them—the worst they can do is tell you to sling your hook. Furthermore, how good area they? How does their experience compare with yours?

In essence, the overruling question is this: where do you fit in with the competition? Are you nearer to the bottom or the top of the scale? The answer to this question dictates how aggressively you should set your rates.

Supply and Demand

I recently negotiated an improved rate with a client of mine. However, it wasn't as high as I wanted it to be. But I couldn't argue with her point of view:

Writers are, I gotta be honest, insanely easily to come by for very few dollars indeed…given that my background is in writing, it's pretty scary. I've got friends who are Financial Times journalists that are increasingly shitting themselves! I mean, it's great for the company and all that, but not for quality folk.

I don't agree with her clear implication that you can't make money writing. However, I don't doubt for a moment that she can find an abundance of cheap writers for the type of content her blog produces. My point is this: an abundance (or dearth) of other freelancers like you has a hefty impact on the rate you can set. And here's the kicker: the lower the quality of work you do, the higher the supply of similar freelancers is. So be aware of supply and consider how it can affect your rate. But most importantly, work hard to get yourself above the first few rungs of the ladder as quickly as possible—otherwise you will always be dealing with negotiations like the above.

Furthermore, consider the demand specific to you. Do people approach you by referral? Do they seek you out specifically because they like your work? Such prospective clients are likely to value your work far more highly than those that you seek out.

Indirect Benefits

When setting or negotiating a rate (and/or considering your MAR), it is important to not think solely about financial compensation. Take the client mentioned above. I continue to work for her, even though I get paid an equivalent hourly rate of about half as much as every single other client I have.

Why? Because of the indirect benefits. Namely the following:

It is an authoritative blog, which is good for my reputation.

The byline under each of my articles drives traffic to my blog.

The work is consistent and secure (i.e. I trust her).

There are many more indirect benefits that can affect the rate you would be happy to accept, such as potential (could the work lead to greater things?), and referrals (e.g. a client in a new sector). Bear them in mind.

Negotiating

Negotiation is something that comes fairly naturally to me. I worked in property management and development in my previous life, and was no stranger to seven figure negotiations. That may well be why I have no difficulty in negotiating with freelance clients on what are, by comparison, minuscule deals.

But that doesn't detract from my firm belief that negotiating does not have to be a terrifying prospect. Whilst the common perception seems to be that clients are after a cheap deal, I have found that not to be the case, for the most part. This could be a side-effect of the forward-thinking blogging culture I generally operate in, but you only have to see how well my friend Ruth is doing to see how handsomely corporate clients are prepared to pay.

With that said, let's delve into the world of negotiation for freelancers.

The Scope of Works

Always be certain of the scope of the job you are pricing. I cannot stress that enough. A freelancer's worst nightmare is a misunderstanding between them and a client regarding the scope of the works. This can lead to a faltering relationship, and extra hours allocated to a job that you did not budget for. Make sure that you come to an agreement on the precise nature and scope of the work. If the job is to be more of a work in progress, come to a temporary agreement with the client, on the basis that a firm contract will be agreed for the long term at a future date.

But whatever you do, make sure that you come to a unambiguous long term agreement regarding the nature of the work. This can be in the form of an email exchange, or a formalized contract. The point is that you must be able to clearly demonstrate that you have delivered exactly what the client asked for.

Pricing a Job

The key to pricing a job is to break it down into its constituent parts. Once you have segmented a job, allocate a conservative time frame to each part (plus contingency). Add up all the elements, and consider adding an overriding contingency. The client is more likely to negotiate than not, and many will feel that they are being hard done by if they don't get the price knocked down at least a little (regardless of whether or not the price represents true value). So be sure to price your job accordingly.

What is hopefully clear at this point is that all of the above factors should be taken into account when pricing a job. Ask yourself the following questions:

What service value am I offering?

What are my competitors charging?

How competitive is the market in which I am operating?

How strong is the supply/demand for work of this type?

Are there any indirect benefits relating to working with this client?

Your MAR is your bottom line. The key now is in making a proposal that strikes a balance between maximizing your earning potential, and not scaring the client off.

Worst case scenario, your prospective client sees your price, and walks away. The likelihood of this is small, unless you have really priced yourself out of the market (in which case, you need to go back to the drawing board in terms of analyzing what you deem to be a reasonable rate). It is far more likely that they will attempt to negotiate you down, which is where the conservatism you built into your price comes into play.

How hard you choose to negotiate above your MAR is essentially down to how much you want the job. Do you have lots of work booked? Can you afford to play hardball? Or, are you in need of any and all work at or above your MAR? Consider your situation and negotiate accordingly. Remember, so long as the equivalent hourly rate is above your MAR, the additional pay represents the potential for a boosted income. It is not the difference between life and death. If you are genuinely in need of the work, don't try to get too cute with your negotiations.

Your Bottom Line

If your client attempts to negotiate below your MAR, you have one of three options:

Accept

Stand your ground

Negotiate the scope of works

Option 1 is only to be considered if you feel that the indirect benefits associated with the job outweigh the difference between the actual equivalent hourly rate and your MAR. I have a client who is a prime example of this. They pay me a little under my MAR, but I get a free link back to this blog in return, which makes up for it. After all, I expend plenty of energy in promoting this blog without any financial reward, so getting paid to do the same can't be a bad thing, can it?

Option 2 should be taken if you are comfortable that your MAR should not be breached for the job at hand—a straightforward decision if there are no indirect benefits.

Option 3 represents a compromise in service delivery, and I am not keen on it. It can often lead to client dissatisfaction, and a fractured relationship.

Generally speaking, I will stick with option 1. After all, if they are not willing to pay what keeps a roof over your head, why on earth would you want to work for them? Finally, if a client plays hardball and you find yourself saying "I might be willing to work for a little less," it may be time to reassess your MAR.

Retainers

In my opinion, you should never request a retainer (unless the job is particularly large and will require a lot of upfront investment). Nothing screams "I don't trust you" more than requesting a retainer. It is not a good way to start what will hopefully be a profitable long term relationship.

Instead, vet your clients appropriately. If you are uncomfortable with the proposed payment terms, suggest a shorter payment period over a probation period, followed by a permanent long term agreement (if applicable to the scope of works). Finally, understand that the occasional non-paying client is a cost of business. The sooner you accept that, the better.

Rates Are Not Permanent!

Budding freelancers are often paralyzed into inaction when it comes to setting rates. But remember this: each client is only one client, and rates are never permanent. In negotiating a rate with a client, the worst outcome is that you lose that client. It's not the end of the world.

I've said the following to new clients on more than one occasion: Let's start with this, and take stock after a few articles to see how expectations match reality in terms of the scope of works.

I have never had a client react negatively to this. The answer has always been something along the lines of, "that seems fair" (because it is fair—for both parties). If you act towards your client in such a way that demonstrates your trust, they are far more likely to want to work with you, than try to rip you off. And if you are totally transparent in the way you do business, they will want to work with you in the long term.

In conclusion, the key to setting and negotiating rates successfully (beyond your reading of this article) is simply to do it. The more clients you negotiate with, the more experienced and capable you will be come. It's that simple.